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832019 Five Steps to Solving Europe
httpslidepdfcomreaderfullfive-steps-to-solving-europe 14
Five Steps to Solving Europersquos Debt
CrisisBy PETER THAL LARSENPublished August 21 2011
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paraThe crisis of 2008 is repeating itself in reverse Three years ago
European governments stepped in to save the banking sectorToday the euro zonersquos indebted sovereigns are threatening to
cause a full-scale bank panic and possibly even another credit
crisis Europersquos lenders must be insulated from their
governments and vice versa Five radical steps could break the
bank-sovereign ldquodoom looprdquo
Enlarge This Image
Pierre-Philippe MarcouAgence France-Pressemdash Getty Images
832019 Five Steps to Solving Europe
httpslidepdfcomreaderfullfive-steps-to-solving-europe 24
Five Spanish banks including Catalunya Caixa have failed the bank stress tests
Related
German Leaders Reiterate Opposition to Euro Bonds as a Way to Ease
Crisis (August 22 2011) paraSTEP 1 SOLVING THE CAPITAL
CONUNDRUM Europersquos weaker banks need capital if they are
to be prevented from pulling the system down The most pressing problems are Spainrsquos cajas or savings banks and those
Italian lenders that barely scraped through Europersquos latest stress
tests Among those that failed the tests were Banco Pastor Caja
de Ahorros del Mediterraacuteneo Banco Grupo Caja3
CatalunyaCaixa and Unnim Private markets are effectivelyclosed and Italy and Spain are scarcely able to afford bailoutsThe solution is to repurpose Europersquos sovereign bailout fund to
inject capital directly into banks mdash much the same way America
retooled its Troubled Asset Relief Program in late 2008
paraWhile the European Financial Stability Facility can already
make loans to countries for the purpose of recapitalizing banks
this shift would be controversial It would mean governmentsceding control of financial institutions to a pan-European body
Still the fund could get a big bang for its buck bolstering thecore Tier 1 capital ratios of Europersquos 90 largest lenders by one
percentage point would cost 100 billion euros or less than the price of Greecersquos second bailout
paraSTEP 2 SOLVING THE FUNDING FREEZE European
banks especially those in Italy and Spain risk a liquidity crisis
if wholesale markets do not reopen to them by autumn And
even if they are able to issue longer-term debt it is likely to be
expensive That could choke off credit to the economy The
answer again lies in reinventing the stability fund to offer
temporary financing guarantees The idea first proposed by
832019 Five Steps to Solving Europe
httpslidepdfcomreaderfullfive-steps-to-solving-europe 34
Morgan Stanley analysts has worked before The United States
and several European countries restored calm after the collapse
of Lehman Brothers by guaranteeing bank finances
paraSTEP 3 PREVENTING BANK RUNS
Even with capital andwholesale funding worries addressed banks would still be
vulnerable to a loss of confidence by depositors Bank deposits
are guaranteed by a lenderrsquos home country and when savers fret
about their governmentrsquos finances they tend to move their cash
mdash something particularly easy to do in the euro zone Deposits
at Greek banks have shrink by roughly 15 percent since the
beginning of 2010 according to European Central Bank data
But if there were a single pan-European deposit plan saverswould be more likely to stay put
paraSTEP 4 SAY NO TO BANKS PROPPING UP THEIR
GOVERNMENTSRegulators have unwittingly cemented the
sovereign-bank link by encouraging lenders to hold larger
reserves of liquid assets mainly in the form of sovereign bonds
Banks in troubled countries have also come under pressure to
prop up their governments by buying even more of their debtTo break this potentially fatal embrace banks should be
subjected to strict limits on their exposure to any singlecountryrsquos bonds
paraSTEP 5 A PAN-EUROPEAN REGULATOR WITH
TEETH If the first four steps were taken the risk would be that
sovereign-bank codependency would re-emerge but on a pan-
European level Preventing that from happening requires
creditors to face real losses if a bank falls over Big lenders must
also be structured so they can be safely wound down Achieving
that would require a single euro zone financial supervisor mdash
something national regulators would no doubt resist But
America provides a good model with the Federal Reserve and
832019 Five Steps to Solving Europe
httpslidepdfcomreaderfullfive-steps-to-solving-europe 44
the Federal Deposit Insurance Corporation overseeing the
system with the help of regional bodies
paraTHE CAVEAT These ideas would not instantly fix the
sovereign debt large deficits and stagnant growth that plaguethe euro zone But removing banks from the equation would lift
one large potential fiscal burden from governments And banks
no longer shackled to sovereign fortunes would find it easier to
extend credit
paraAs ever the problem is politics This plan would be a big lunge
forward in European integration Politicians and voters who balk
at lending to other countries would have to be persuaded to
underwrite the euro zonersquos financial system But if Europersquossquabbling leaders have a better alternative let them get on with
it
para
832019 Five Steps to Solving Europe
httpslidepdfcomreaderfullfive-steps-to-solving-europe 24
Five Spanish banks including Catalunya Caixa have failed the bank stress tests
Related
German Leaders Reiterate Opposition to Euro Bonds as a Way to Ease
Crisis (August 22 2011) paraSTEP 1 SOLVING THE CAPITAL
CONUNDRUM Europersquos weaker banks need capital if they are
to be prevented from pulling the system down The most pressing problems are Spainrsquos cajas or savings banks and those
Italian lenders that barely scraped through Europersquos latest stress
tests Among those that failed the tests were Banco Pastor Caja
de Ahorros del Mediterraacuteneo Banco Grupo Caja3
CatalunyaCaixa and Unnim Private markets are effectivelyclosed and Italy and Spain are scarcely able to afford bailoutsThe solution is to repurpose Europersquos sovereign bailout fund to
inject capital directly into banks mdash much the same way America
retooled its Troubled Asset Relief Program in late 2008
paraWhile the European Financial Stability Facility can already
make loans to countries for the purpose of recapitalizing banks
this shift would be controversial It would mean governmentsceding control of financial institutions to a pan-European body
Still the fund could get a big bang for its buck bolstering thecore Tier 1 capital ratios of Europersquos 90 largest lenders by one
percentage point would cost 100 billion euros or less than the price of Greecersquos second bailout
paraSTEP 2 SOLVING THE FUNDING FREEZE European
banks especially those in Italy and Spain risk a liquidity crisis
if wholesale markets do not reopen to them by autumn And
even if they are able to issue longer-term debt it is likely to be
expensive That could choke off credit to the economy The
answer again lies in reinventing the stability fund to offer
temporary financing guarantees The idea first proposed by
832019 Five Steps to Solving Europe
httpslidepdfcomreaderfullfive-steps-to-solving-europe 34
Morgan Stanley analysts has worked before The United States
and several European countries restored calm after the collapse
of Lehman Brothers by guaranteeing bank finances
paraSTEP 3 PREVENTING BANK RUNS
Even with capital andwholesale funding worries addressed banks would still be
vulnerable to a loss of confidence by depositors Bank deposits
are guaranteed by a lenderrsquos home country and when savers fret
about their governmentrsquos finances they tend to move their cash
mdash something particularly easy to do in the euro zone Deposits
at Greek banks have shrink by roughly 15 percent since the
beginning of 2010 according to European Central Bank data
But if there were a single pan-European deposit plan saverswould be more likely to stay put
paraSTEP 4 SAY NO TO BANKS PROPPING UP THEIR
GOVERNMENTSRegulators have unwittingly cemented the
sovereign-bank link by encouraging lenders to hold larger
reserves of liquid assets mainly in the form of sovereign bonds
Banks in troubled countries have also come under pressure to
prop up their governments by buying even more of their debtTo break this potentially fatal embrace banks should be
subjected to strict limits on their exposure to any singlecountryrsquos bonds
paraSTEP 5 A PAN-EUROPEAN REGULATOR WITH
TEETH If the first four steps were taken the risk would be that
sovereign-bank codependency would re-emerge but on a pan-
European level Preventing that from happening requires
creditors to face real losses if a bank falls over Big lenders must
also be structured so they can be safely wound down Achieving
that would require a single euro zone financial supervisor mdash
something national regulators would no doubt resist But
America provides a good model with the Federal Reserve and
832019 Five Steps to Solving Europe
httpslidepdfcomreaderfullfive-steps-to-solving-europe 44
the Federal Deposit Insurance Corporation overseeing the
system with the help of regional bodies
paraTHE CAVEAT These ideas would not instantly fix the
sovereign debt large deficits and stagnant growth that plaguethe euro zone But removing banks from the equation would lift
one large potential fiscal burden from governments And banks
no longer shackled to sovereign fortunes would find it easier to
extend credit
paraAs ever the problem is politics This plan would be a big lunge
forward in European integration Politicians and voters who balk
at lending to other countries would have to be persuaded to
underwrite the euro zonersquos financial system But if Europersquossquabbling leaders have a better alternative let them get on with
it
para
832019 Five Steps to Solving Europe
httpslidepdfcomreaderfullfive-steps-to-solving-europe 34
Morgan Stanley analysts has worked before The United States
and several European countries restored calm after the collapse
of Lehman Brothers by guaranteeing bank finances
paraSTEP 3 PREVENTING BANK RUNS
Even with capital andwholesale funding worries addressed banks would still be
vulnerable to a loss of confidence by depositors Bank deposits
are guaranteed by a lenderrsquos home country and when savers fret
about their governmentrsquos finances they tend to move their cash
mdash something particularly easy to do in the euro zone Deposits
at Greek banks have shrink by roughly 15 percent since the
beginning of 2010 according to European Central Bank data
But if there were a single pan-European deposit plan saverswould be more likely to stay put
paraSTEP 4 SAY NO TO BANKS PROPPING UP THEIR
GOVERNMENTSRegulators have unwittingly cemented the
sovereign-bank link by encouraging lenders to hold larger
reserves of liquid assets mainly in the form of sovereign bonds
Banks in troubled countries have also come under pressure to
prop up their governments by buying even more of their debtTo break this potentially fatal embrace banks should be
subjected to strict limits on their exposure to any singlecountryrsquos bonds
paraSTEP 5 A PAN-EUROPEAN REGULATOR WITH
TEETH If the first four steps were taken the risk would be that
sovereign-bank codependency would re-emerge but on a pan-
European level Preventing that from happening requires
creditors to face real losses if a bank falls over Big lenders must
also be structured so they can be safely wound down Achieving
that would require a single euro zone financial supervisor mdash
something national regulators would no doubt resist But
America provides a good model with the Federal Reserve and
832019 Five Steps to Solving Europe
httpslidepdfcomreaderfullfive-steps-to-solving-europe 44
the Federal Deposit Insurance Corporation overseeing the
system with the help of regional bodies
paraTHE CAVEAT These ideas would not instantly fix the
sovereign debt large deficits and stagnant growth that plaguethe euro zone But removing banks from the equation would lift
one large potential fiscal burden from governments And banks
no longer shackled to sovereign fortunes would find it easier to
extend credit
paraAs ever the problem is politics This plan would be a big lunge
forward in European integration Politicians and voters who balk
at lending to other countries would have to be persuaded to
underwrite the euro zonersquos financial system But if Europersquossquabbling leaders have a better alternative let them get on with
it
para
832019 Five Steps to Solving Europe
httpslidepdfcomreaderfullfive-steps-to-solving-europe 44
the Federal Deposit Insurance Corporation overseeing the
system with the help of regional bodies
paraTHE CAVEAT These ideas would not instantly fix the
sovereign debt large deficits and stagnant growth that plaguethe euro zone But removing banks from the equation would lift
one large potential fiscal burden from governments And banks
no longer shackled to sovereign fortunes would find it easier to
extend credit
paraAs ever the problem is politics This plan would be a big lunge
forward in European integration Politicians and voters who balk
at lending to other countries would have to be persuaded to
underwrite the euro zonersquos financial system But if Europersquossquabbling leaders have a better alternative let them get on with
it
para
